Markets always find a new way to make a fool out of you

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Markets always find a new way to make a fool out of you

Markets always find a new way to make a fool out of you. Sometimes that is when the market has done exceptionally well, and you have been too cautious. That tends to be my error as well. I’m too cautious in bull markets, but on the good side, I don’t panic in bear markets, even the most severe of them.

The bull market keeps hitting new highs.  It’s the second longest bull market in the last eighty years, and the third largest in terms of cumulative price gain.  Let me show you a graph that simultaneously shows how amazing it is, and how boring it is as well.

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The amazing thing is how long the rally has been.  We are now past 3000 days.  What is kind of boring is this — once a rally gets past two years time, price return results fall into a range of around 1.1-2.0%/month for the rally as a whole, averaging around 1.4%/month, or 18.5% annualized.  (The figure for market falling more than 200 days is -3.3%/month, which is slightly more than double the rate at which it rises.  Once you throw in the shorter time frames, the ratio gets closer to double — presently around 2.18x.  Note that the market rises are 3.2x as long as the falls.  This is roughly similar to the time spans on the credit cycle.)

That price return rate of 1.4%/month isn’t boring, of course, and is close to where the stock market prediction model would have predicted back in March 2009, where it forecast total returns of around 16%/year for 10 years.  That would have implied a level a little north of 2500, which is only 3% away, with 21 months to go.

Have you missed the boat?

If you haven’t been invested during this rally, you’ve most like missed more than 80% of the gains of this rally.  So yes, you have missed it.

“The Moving Finger writes; and, having writ,

Moves on: nor all thy Piety nor Wit

Shall lure it back to cancel half a Line,

Nor all thy Tears wash out a Word of it.”

? Omar Khayyám from The Rubaiyat

In other words, “If ya missed the last bus, ya missed the last bus.  Yer stuck.”

We can only manage assets for the future, and only our decrepit view of the future is of any use.  We might say, “I have no idea.” and maintain a relatively constant asset allocation policy.  That’s mostly what I do.  I limit my asset allocation changes because it is genuinely difficult to time the market.

If you are tempted to add more money now, I would tell you to wait for better levels.  If you can’t wait, then do half of what you want to do.

A wise person knows that the past is gone, and can’t be changed.  So aim for the best in the future, which at present means having at least your normal percentage of safe assets in your asset allocation.

Bull Market

(the closing graph shows the frequency and size of market gains since 1928)

Article by David J. Merkel, CFA, FSA - The Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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